The New Feudalism

Today's Wall Street Journal listed Michigan as one of the states (26 in all, plus DC) that now permit perpetual trusts (p. R4). I was surprised, so I did some digging on the Web. Sure enough, Michigan abolished the Rule Against Perpetuities as recently as the spring of 2008. Somehow I missed that. It did not become a big issue in the media for some reason, but it should have.

It seems that a good part of the reaction (a word I use advisedly) in our country to the crisis of capitalism is to give up on the capitalist system in favor of a return to feudalism. We have no estate tax right now, and a recent New York Times story on the consequences of this raised a great many reader comments approving of the new situation. We have repealed the RAP in more than half the states. In the last election, it looked for a while like the Presidency would become the property of the Bushes and the Clintons, recalling the good old days of Lancaster versus York. Now all we have to do is bring back primogeniture and entail, and we'd be back in 1400.

I guess that some people would be comfortable putting themselves under the protection of the DeVos's or the Van Andel's. For myself, I prefer democratic capitalism. No, not the kind caricatured in some economic theory where all people do is follow their pecuniary interest. (See today's Times about a new idea: paying people to take their prescriptions.) I want the kind of capitalism where corporate leaders look out for their investors, creditors, vendors, customers, workers, and neighbors as much as they look out for themselves. I want capitalism where the standards of conduct go beyond "Is it legal?" or "Would it enhance my personal wealth?"

But maybe that's where the push for a new feudalism comes from. Yes, people want security, physical and economic, and they don't trust government or corporations to give it to them. Beyond that, they want a world of "noblesse oblige", where they wealthy felt an obligation to look out for the interests of ordinary people, at least in their own community (manor). They want a world where the Christian church had real power, and where everyone shared a common, distinctively Christian understanding of the structure of society and individuals' roles in it. I understand the nostalgia. (My wife watches HGTV, and you'd be amazed at the number of guys building castles in their backyards.) The trouble is that you end up with a stagnant economy, a world where most people are poor and dependent, and no hope for anything better.

John Tiemstra

The Limits of Policy

David Brooks has another good column. His advice and perspective is especially good for those heavily invested in the policy world. The entire column is worth reading, but a good section is quoted below, with my thoughts following:

In her book, “What Money Can’t Buy,” Susan E. Mayer of the University of Chicago calculated what would happen if you could double the income of the poorest Americans. The results would be disappointingly small. Doubling parental income would barely reduce dropout rates of the children. It would have a small effect on reducing teen pregnancy. It would barely improve child outcomes overall.

So when we’re arguing about politics, we should be aware of how policy fits into the larger scheme of cultural and social influences. Bad policy can decimate the social fabric, but good policy can only modestly improve it.

Therefore, the first rule of policy-making should be, don’t promulgate a policy that will destroy social bonds. If you take tribes of people, exile them from their homelands and ship them to strange, arid lands, you’re going to produce bad outcomes for generations. Second, try to establish basic security. If the government can establish a basic level of economic and physical security, people may create a culture of achievement — if you’re lucky. Third, try to use policy to strengthen relationships. The best policies, like good preschool and military service, fortify emotional bonds.

I think he might over-state the case with this line: "Bad policy can decimate the social fabric, but good policy can only modestly improve it." This seems to imply that we are in a "diminishing returns" region in terms of policy quality, where we get a big negative impact if we mess up, but a small positive impact if we do the right thing.

The overall tone of the article certainly seems to fit with recent experience in education policy though. Even radical reforms of the way we structure and fund schools seems to have a relatively small impact relative to the relevant "cultural" factors that Brooks mentions.

Dear "Henry"

I read your op-ed in today's Wall Street Journal. Congratulations. You're in the 32% federal tax bracket. I'm in the 25% bracket, and haven't seen a raise in a while now. You're better off financially than the vast majority of Americans, including me, which is why you pay a lot of taxes.

You do work very hard, which is admirable, but that is not the only cause of your affluence. Many people work harder than you do and make less money. Others work less than you do, and earn more. Within occupational categories, working harder usually gets you more pay, but across occupations, the connection often fails. So don't take the view that your hard work entitles you in some way to your affluence. Markets are much more capricious than that. Economists can make a case that if markets are sufficiently competitive, the market-based distribution of income is efficient. But we know that markets, especially labor markets, are not that competitive. Neither mainstream economics nor mainstream moral philosophy gives us any reason to think that the market distribution of income has any important moral qualities. To think that we somehow "deserve" our market incomes is a mistake. (It is an increasingly common mistake in the WSJ. Arthur Brooks made the same mistake yesterday.) So pardon me, but I find it hard to feel sorry for you.

Then you complain about tax money being "wasted", too much being "confiscated", and having to "carry so many people on my back". What about all the money that went to defend your country, protect you from crime, ensure the safety of your food, pave the roads you ride on, educate you and your children, maintain the parks you enjoy, and provide high culture to enlighten you? I think you benefit a lot from your tax money, and you would miss these government services if they were gone.

You talk about dropping out and living "on the dole" for a while. Well, it's your choice I suppose. I think the reason you haven't done it yet and probably won't ever do it is that you realize how big a reduction in your standard of living would be involved. You like being affluent. Nothing wrong with that. But your whining about taxes is just ill-informed and, frankly, inappropriate.

Sincerely,

John

What I want you to learn

One of our colleagues from another department was asking what we try to teach students in our core courses. Here is what I told him I want students to take away from econ 151:

Long-term economic growth is the consequence of division of labor, specialization, and exchange.

Just because both parties benefit from a transaction, they don't necessarily benefit equally. The distribution of the benefits of specialization and exchange depends on the relative power of the parties.

People's behavior is the consequence of both their preferences and their constraints. If you don't understand another's behavior, don't be too quick to attribute it to preferences or values. Look also at the choices they have. On the other side, don't attribute all behavior to economic incentives. Incentives matter, but values and preferences matter too--sometimes more.

Economic efficiency is desirable, but it is not the only thing we're looking for. We also want distributive justice, ecological sustainability, and caring relationships within the economy. Sometimes there are tradeoffs among these different goals. However, it is good also to look for ways to achieve more than one of them simultaneously.

When people disagree about public policy, it is usually not because they want to achieve different goals. More often they disagree about the analysis: that is, what policies will bring about the effects they desire. But these theoretical disagreements often have value judgments at bottom: What is a good theory? What drives human behavior? Can other people be trusted? It is here that "worldviews" matter.

Too long an answer, but as some great writer said, I don't have enough time to give you a short one.

No more executive bonuses!

I very much like the article in today's Wall Street Journal by Henry Mintzberg. I think he has the right idea. He sees the business firm as a community of people, and executives as leaders and members of that community. He also argues that the success or failure of a business can not be attributed to one or a few individuals with exalted titles. Under these conditions, bonuses can not be justified as in any sense deserved. Bonuses send the wrong message to employees, namely that their contributions to the firm don't matter. And bonuses create incentives for excessive risk-taking and short-term decision-making. It's better to loot the firm's intangible assets for short-term profit gains than to tend the business for a sustainable future.

Economists have a lot to answer for here, too. Once we began teaching that workers were interchangeable parts like machines, and just as replaceable, we opened the way for the idea that there is really only one person who counts in a business, and that's the CEO. While it may be a convenient way to model labor markets for some purposes, the unintended effects on business behavior, especially compensation practices, have been devastating. Not only the growing inequality of the American income distribution and American society, but also the modern wave of business scandals and the financial collapse of 2008 have their roots in this type of thinking. We need more people to say it out loud, as Prof. Mintzberg has.

I liked David Brook's framing of the health care debate as "The Values Question." He sums up the dilemma succinctly:

The bottom line is that we face a brutal choice.

Reform would make us a more decent society, but also a less vibrant one. It would ease the anxiety of millions at the cost of future growth. It would heal a wound in the social fabric while piling another expensive and untouchable promise on top of the many such promises we’ve already made. America would be a less youthful, ragged and unforgiving nation, and a more middle-aged, civilized and sedate one. [emphasis added]

I agree (mostly). He makes a strong assumption concerning the disastrous level of costs and drag on the economy from a revised health care approach. That may actually be the case, or it may turn out to be overstated. However, have we not also overestimated the boost to the economy of supply-side economics, and for that matter, underestimated the drag on the economy from the disparity in income and opportunity (e.g. lost H.C.)? I wonder, since we have erred on the side of allocation for so long, might it be time to err on the side of distribution and see what that might do for the well-being, and even productivity, of the nation? Is the choice between decency and vibrancy truly a zero-sum game?

A Dialogue on James K.A. Smith’s Account of Markets and Christian Desire

After reading James K.A. Smith's latest book: Desiring the Kingdom: Worship, Worldview, and Cultural Formation
I made some favorable comments about Jamie's argument that market participation may shape a set of desires which are contrary to, and in competition with, the desire for God. As is often the case, John was able to help me think through some of the issues, in the ensuing exchange (posted here with permission).

First, a summary of Smiths argument: modern consumer capitalism, by providing a set of practices, routines (or even liturgies) and images of an ideal life, is able to shape people's ultimate desires in harmful ways. People devote a large part of their life engaged in market activity at work and at the mall, and thus spend hours practicing consumption and profit maximization. Moreover, the most powerful media messages are ones focused creating the desire for a set of consumption goods that are necessary to achieve a certain lifestyle. In the end, this lifestyle, with all of the profiting and consuming that goes with it, becomes the ultimate vision of the good life that people adopt.

Now, John's comment:

My view on this radical orthodox approach to markets, values, and Christianity is that they have a mistaken understanding of how people operate in markets. They believe that people learn to maximize utility or profits or standard of living or something similar in the economy, and then bring that home. My view is that people have a set of beliefs that is their functional religion, and they operate out of that in all areas of their life. In my view, most businesses do not maximize profits. Many of them these days have a mission statement in which they describe a whole set of values that they try to fulfill. Same with individuals. We have plenty of evidence from behavioral economics that people are not "rational" in their economic behavior. You can find me advocating this position as early as "Stories Economists Tell" in 1988. It is also in my review essay on the Wealth, Poverty, and Human Destiny book that appeared in Faith and Economics: http://www.gordon.edu/ace/pdf/noelEtAlF04.pdf . (It starts around p. 67.)

My response:

I had read essay you linked to here about a year ago, but I had not connected those arguments to Jamie's work. I think that your response to this line of argument provides a nice dose of reality to a theory that over-simplifies the human condition. In my reading of Jamie's book, I kept thinking "this does not sound quite right" but could not put my finger on it. For that I thank you.

I do think that his argument might have merit in the following way: I do buy that the market system, and specifically the wealth of consumption options available to us today, makes a certain form of consumption-based idolatry especially easy to adopt. This, I think, is Jamie's main argument when he states that the market (or the mall) is the primary competitor with the church today for people's hearts. Part of what makes this type of idolatry easy to adopt is that consumption and shopping are increasingly a form of entertainment, but also because modern marketing really is pretty good at shaping people's desires.

One open question in my mind is whether all of this amounts to a re-shaping of people's "ultimate desires" or if we are simply moving around people's preferences for one set of goods/services over another. Jamie claims the former, if the latter is true, then modern consumer capitalism is much less pernicious.

John's response:

I used to be a follower of Galbraith on the issue of the effects of advertising, thinking that it really did shape preferences. Now I'm more inclined to think that the bulk of our purchases follow from a few very basic "lifestyle" decisions, and that advertising mainly influences teenagers who have a lot of discretionary income and are unduly sensitive to what is "cool." There's so much advertising now, especially on TV, that I don't even understand. It's not aimed at folks my age.